Continuing investigations and charges against a China-based company and its executive and a Hawaii resident and the firms he used, as well as charges against a New Jersey man in a fraudulent Ponzi-type real estate scheme, were among the enforcement activities reported by the SEC during the week.
Real Estate Ponzi Scheme in New Jersey
Charges were filed by the SEC on Thursday, in parallel with a criminal indictment announced by the U.S. Attorney's Office for the District of New Jersey, against a Watchung, N.J., man.
The SEC charged that David M. Connolly operated a Ponzi-like scheme involving a series of investment vehicles formed for the purported purpose of purchasing and managing rental apartment buildings in New Jersey and Pennsylvania.
Connolly, according to the complaint, induced investors to buy shares in real estate investment vehicles he created through his firm, Connolly Properties Inc. He promised investors monthly dividends based on cash flow profits from rental income at the apartment buildings, as well as the growth of their principal from the appreciation of the property.
However, none of Connolly's securities offerings in the investment vehicles were registered with the SEC as required under the federal securities laws. The real estate investments did not produce the projected dividends, and Connolly instead made Ponzi-like dividend payments to earlier investors using money from new investors.
Connolly ultimately raised in excess of $50 million from more than 200 investors in more than 25 investment vehicles, and also siphoned off at least $2 million in investor funds for his personal use. The whole scheme collapsed in 2009, with the properties going into foreclosure and total losses for the investors of their equity.
The SEC seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties from Connolly, who was charged with violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Connolly was also indicted for one count of securities fraud, in addition to other charges.
More than $14 Million in Secret Loans
The SEC filed charges Monday and is seeking a final judgment with penalties against a China-based natural gas company and an executive for defrauding investors by secretly loaning company funds totaling more than $14 million to benefit the executive's son and nephew while failing to disclose the true nature of the loans.
Investigation is continuing into the case of Qinan Ji, the former CEO who remains chairman of China Natural Gas Inc., and who was alleged by the SEC to have coordinated two short-term loans totaling more than $14 million in January 2010. Ji approved both loans without obtaining prior authorization from the board or informing the CFO.One of the loans, for $9.9 million and wired directly into a Demaoxing bank account with a note stating that the amount was for "raw material expenses," went to a real estate firm co-owned by Ji's son and nephew through a sham borrower. The other, for $4.4 million, went to Shaanxi Juntai Housing Purchase Co., a business partner of the real estate firm. Ji signed the company's SEC filings that falsely stated the loans were made to third parties, and then lied about the true borrower to China Natural Gas' board, investors and auditors as well as during the company's internal investigation.
